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GIS | Continuing to Make the Tough Calls

Takeaway: We don’t believe this should be a sign that times are still bad at GIS.

GIS | Continuing to Make the Tough Calls - Chart 1


GIS is on the Hedgeye Best Ideas as a LONG


General Mills announced today, the approval of Project Compass, a restructuring plan designed to enable growth in the International segment, which will start in Q1 FY16. Very similar to Project Catalyst, which took place over about six months in FY15 in the U.S. based business in cutting approximately 800 positions. As part of this initiative management expects to cut 675 to 725 positions.


These restructuring actions are expected to be completed by early fiscal 2017, and will generate approximately $45 to $50 million, with approximately $25 to $30 million of cost savings being realized in fiscal 2016.


We don’t believe this should be a sign that times are still bad at GIS. With Project Catalyst recently ending in February, the organization simply needed time to digest learnings and then implement the initiatives across the broader organization. Albeit small in actual dollars, management continues to impress us with their willingness to make the tough calls that are necessary to succeed.


Next steps to a fundamental turnaround are growing the cereal category, continuing to innovate on the brands, and acquire some growth along the way.

Expecting a Consumer-led Recovery?

Conclusion: Household consumption growth is carrying the U.S. economy – for now. We do not think that is sustainable and reiterate our call for the YoY rate of change in domestic economic growth to slow throughout the balance of the year.


With the advent of this morning’s personal income and spending data, the U.S. economy is suddenly looking much better than it had been trending – particularly in YoY rate-of-change terms.


Specifically, real personal consumption expenditures growth accelerated in May on a MoM, YoY and 2Y Average basis as the savings rate ticked down -30bps. These are good numbers and we’d be both remiss and intellectually dishonest to suggest otherwise.


With respect to how our predictive tracking algorithm contextualizes the data, it is now accelerating on a sequential, trending and quarterly average basis:


Expecting a Consumer-led Recovery? - REAL PCE


Expecting a Consumer-led Recovery? - PERSONAL SAVINGS RATE


Expecting a Consumer-led Recovery? - Personal Income   Spending 


The inflection in real PCE, which includes spending on goods and services and accounts for 69% of GDP, confirms the positive inflection in retail sales growth that we saw two weeks ago – specifically sales growth within the omnipotent control group that accounts for 24% of GDP.


Expecting a Consumer-led Recovery? - RETAIL SALES


One of the reasons we contextualize data in trending YoY rate-of-change terms is to have a consistent framework for incorporating new data in our Bayesian inference [modeling] process. It’s either accelerating or decelerating on a given duration of relevance – either monthly or quarterly or some meaningful combination of the two (e.g. a three-month moving average). The charts above and table below contextualize the output of this framework in the most succinct manner we can illustrate.


Expecting a Consumer-led Recovery? - U.S. Economic Summary Table


What you should glean from this table is the trending divergence between the [accelerating] consumption side of the economy and the [decelerating] investment, manufacturing and export side of the economy with the former essentially playing the role of Atlas – for now.


Expecting a Consumer-led Recovery? - DURABLE GOODS


Expecting a Consumer-led Recovery? - CAPITAL GOODS


Expecting a Consumer-led Recovery? - FACTORY ORDERS


Expecting a Consumer-led Recovery? - INDUSTRIAL PRODUCTION


Expecting a Consumer-led Recovery? - MANUFACTURING PMI


With base effects steepening sharply in 2H15 and national retail gasoline prices up nearly +40% off their YTD lows, we question the suitability of any consumer-driven recovery in the absence of a material acceleration in wage growth.


Expecting a Consumer-led Recovery? - GDP COMPS


But as the following chart shows, you DO NOT want to see a material acceleration in wage growth if you’re in the camp that a recession would be bad for the capital market cycle. Wage growth peaks EXTREMELY late cycle, so the next acceleration (if any) may essentially sound the alarm on the next bear market.


Expecting a Consumer-led Recovery? - WAGE GROWTH


Moreover, trends in the services and composite PMI data (also released today) suggest domestic consumption growth took a material turn for the worse here in June – just as the aforementioned steepening of base effects would’ve predicted.


Expecting a Consumer-led Recovery? - SERVICES PMI


Expecting a Consumer-led Recovery? - COMPOSITE PMI 


Broadening this discussion back to our process, the primary reason we focus on NSA YoY rate of change rather than the QoQ SAAR rate of change – besides the fact that the latter is extremely volatile and has become increasingly nonsensical – is because the YoY rate of change most closely resembles how most investors analyze companies and helps us translate what we are seeing with respect to top-down trends to what bottom-up analysts are seeing in corporate operating metrics.


Additionally, it affords us true apples-to-apples growth rate comparisons across cycles, whereas the QoQ SAAR figures are subject to ever-changing seasonal adjustment methods that distort the reliability of the data over time.


Narrowing this discussion back to this economic cycle, we expect headline (i.e. QoQ SAAR) growth to accelerate in 2Q15 to ~2.5% before bouncing around ~2% in 2H15. That sounds good when coming off a -0.2% contraction in 1Q15, but that nets out to a full-year growth rate of +2.2% YoY and nominal GDP growth of ~3% - which would be the slowest pace since 2009.


Expecting a Consumer-led Recovery? - UNITED STATES


Would you hike interest rates on that? If so, please email us why.


All told, the level of mischaracterization of domestic economic growth among market participants is fast approaching all-time highs, probably second only to mid-2009 when we were ragingly bullish amid a myriad of consensus "Great Depression" storytelling. But when you apply a repeatable, quantitative analytical framework to the discussion, navigating these macro risks becomes a little bit easier.


It's still not easy though!


Darius Dale


Retail Callouts (6/25): NKE, UA, FL, BBBY, TGT

Takeaway: Nike thoughts into the print. FL's first concept with UA. BBBY sentiment at 4 year lows. Target CMO out.

NKE - Key Issues Into The Print - To see our full note CLICK HERE


FL, UA - Foot Locker's First Concept Partnership with Under Armour


One of the core growth initiatives presented at Foot Locker's March Investor Meeting was to test and expand it's vendor partnership concepts. This won't make a dent in the company's dependence on NKE which accounts for 73% of purchases and close to 80% of sales. But it's at least a step in the right direction. FL has co-developed 5 shop-in-shop concepts with Nike (House of Hoops, Kicks Lounge, Yardline, Flight 23, Fly Zone), 2 with Adidas (a-Standard, Collective), and 1 with Puma (Puma Lab). This concept with Under Armour called The Armoury is its first with the brand. Unlike other partnerships this should have a much heavier apparel weighting. This will be a big tell for us. On one hand this syncs with one of the company's core growth pillars, but if history tells us anything its that FL doesn't do apparel well.


For FL specifically, this is another example of the shift in its capital allocation plans as much of the model was driven during Hick's tenure by asset rationalization. That took RNOA up to 30% from 5.5% over a 6 year time period. Now the plan is to reinvest capital by growing the store base, expanding new concepts (like The Armoury), and investing in digital, women's, and apparel. That means returns are coming down. If the company achieves its financial goals, it will be growing EPS in the low double digits, that is a mere quarter of the 45% CAGR it has printed over the past five years when it saw its’ multiple go from 11.5x trough margins/earnings, to 15.5x peak margins/earnings AND it will take increased capital spending to get there.

Retail Callouts (6/25): NKE, UA, FL, BBBY, TGT - 6 25 chart1


BBBY - Sentiment At 4 Year Lows, Still No Bottom On Margins

1) The print was more or less in line, but that doesn’t mean that the growth algorithm was good. Flat earnings on 3% revenue growth with the share count down 31mm or 15% percent and CFFO down 16% -- leaves a lot to be desired. The change in EBIT margins has been in negative territory in each of the past 12 quarters and BBBY hasn't hit the bottom yet as e-commerce costs will continue to weigh on both the gross margin (shipping expense) and SG&A (IT investments) lines.

2) Valuation at 13x P/E and 7.2x EBITDA seems so cheap at face value for what was once such a high quality company -- especially with sentiment at 4 year lows (usually a bullish indicator). But, in order to get more positive on this name we'd need much more confidence that BBBY could reaccelerate the top line organically and that margins will simply find a bottom. With sq. ft. growth mostly tapped that means BBBY needs to rely on taking market share in its existing stores (i.e. comping) or significantly accelerating growth in e-commerce in a profitable way. We'll be exploring the market dynamics in much more detail when we release the results of our Home Furnishings survey and 'Launch' on the space on July 29th.

Retail Callouts (6/25): NKE, UA, FL, BBBY, TGT - 6 25 chart2

Retail Callouts (6/25): NKE, UA, FL, BBBY, TGT - 6 25 chart3



Takeaway: Nothing is safe at TGT. Tesija is just 51 years old an still has a lot of good years in her in the retail business. Which leads us to believe that this was a Cornell decision. We've seen a lot of moves since Cornell took the reigns 10 months ago: Canada closure, 20% HQ workforce reduction, Pharmacy business sale to CVS. But, we've yet to see any turnover in the C-Suite. And this appears to be Cornell making room for his own lieutenant, i.e. an outside hire. While that seems like it’d be good news in the long run, the reality is that merchandise is not a problem for Target – it never has been.




VFC - Steven E. Rendle Named to New Position of President & Chief Operating Officer at VF Corporation



ASNA, KSS, JCP - B-t-s Warfare: Justice Dropping Prices 40%



RAD - Rite Aid Completes Acquisition of Leading Independent Pharmacy Benefit Manager (PBM) EnvisionRx



PVH - Jennifer Crawford Resigns From Calvin Klein Inc.



Wildfox CEO Talks Retail Growth, Category Expansion




Early Look

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June 25, 2015

June 25, 2015 - Slide1

China, Germany and Industrials

Client Talking Points


The Chinese made some comments about rate cut expectations and the Chinese stock market closed pretty close to its lows down -3.5% (in the last month Chinese stocks are now down -5.9%). Quantitatively, China has broken its immediate term trade line of support which was right around 4,750 but is still well above its intermediate trend line of support which is closer to 4,200. China is probably a more tradable two-way market now then it is when it was going straight up. 


Beware: Germany is not out of the rough waters yet. The German DAX is broken from a trend perspective; it would have to get back above 11,741 to reverse this. Currently the DAX has immediate downside risk to

10,770. Whether or not you believe the Greeks are going to get something done, it's important to remember that the entire free world of market participants are long the concept of the next central plan having upside as oppose to downside – but what happens if they don’t get it done?! From here the asymmetry is to the downside, you can buy Germany but you don’t have a lot of upside vs downside.


Industrials – just terrible! Oh and by the way, the entire global growth complex is slowing. Yesterday, Industrials were down almost a full percent and are now down 2.1% year-to-date. Industrials are a leading indicator to the downside that we are indeed late cycle and being long late cycle is not a good thing to do.


**The Macro Show - CLICK HERE to watch today's replay, with Macro Analyst Darius Dale, Gaming Lodging & Leisure Sector Todd Jordan and CEO Keith McCullough.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Shares of Penn National Gaming are up approximately 9% since it was added to Investing Ideas on May 26. Our Gaming, Lodging & Leisure team reiterates their high conviction on the stock and notes that Ohio and Kansas have both been super-strong revenue generators in the month of May. This positive development has has led our analysts to raise their estimates even higher (and we're already the highest on the street...).


It was a busy week across the housing space with a host of fundamental releases, builder earnings and notable regulatory updates.   Net-net-net....the past week offered another positive update on the state of the residential real estate market with housing turned in a second week of strong, positive absolute and relative performance. The NAHB HMI (Builder Confidence Index) for June surged across all categories and in all regions, posting its best reading in almost 10 years. Total Starts declined -11% MoM to +1.036 MM units with SF and MF starts declining -5.4% and -20.2% month-over-month, respectively.  Permits, meanwhile, rose to an 8-year high advancing +11.8% sequentially and +25% year-over-year.   The strength in permits augurs forward strength in Starts and suggest residential construction spending will be (increasingly) supportive of GDP growth over the next couple quarters.


Bottom line right now remains that Lower-For-Longer is firmly intact as long as US #GrowthSlowing is. As Keith pointed out on Friday, Consensus Macro is still stubbornly sticking to the tired idea that rates have to go higher - they just have to... because, they haven't? All told, it was a great week sticking with the process on the long side of bonds. Here we feature an in-depth discussion from Senior Macro Analyst Darius Dale which does a thorough job outlining where our macro team currently stands with respect to the Fed, interest rates, markets and economy. The prescient discussion occured just hours before release of the FOMC statement.

Three for the Road


FX: Euro holding yesterday's gains vs USD at $1.12 - TRADE risk range there remains $1.11-1.14



To raise new questions, new possibilities, to regard old problems from a new angle, requires creative imagination and marks real advance in science.

Albert Einstein


An Australian warship patrolling the Indian Ocean seized nearly 600kg (1,300lb) of heroin with an estimated street value of more $500m. The Australian navy said it was the 2nd largest such haul by the Combined Maritime Forces (CMF), a naval partnership of 30 countries to tackle piracy in the Middle East and Indian Ocean.


LEISURE LETTER (06/25/2015)



  • June 25 - AC tax bill 


MGM - Celebrity cruises and MGM are in a partner deal. Starting on June 24, Celebrity’s Captain’s Club and MGM Resorts’ M life members can choose from offers throughout the year. These include complimentary cruises for qualified M life Platinum and NOIR members, and Captain’s Club members can enjoy benefits and special access at MGM Resorts’ destinations, including concerts, events, entertainment venues, restaurants and more.



Genting Singapore - Announced on Tuesday that they will be de-registering their wholly-owned subsidiary, North Spring Investments, LLC in Mongolia.  According to the press release, the de-registration is not expected to have any material impact on the consolidated net tangible assets or EPS of the company.  


AHT - Ashford announced yesterday they are planning to acquire the W Minneapolis and Le Meridien Minneapolis for $101 million. 

  • The 229-room W Minneapolis Hotel - The Foshay, and the 60-room Le Meridien Chambers Minneapolis hotel, put the transaction cost at $349,000 per key.
  • The purchase price represents a trailing 12-month cap rate of 6.0% on NOI and a trailing 14.4x EBITDA multiple
  • On a forward 12-month basis, the purchase price represents an estimated cap rate of 7.0% on NOI and an estimated 12.5x EBITDA multiple



MSC Cruises - MSC Cruises and Etihad Airways announced a new global partnership agreement that will benefit MSC Cruises’ guests traveling to Abu Dhabi and the UAE.

  • Up for offer are “Fly & Cruise” packages from destinations around the world - with Etihad Airways or partner airlines in its network.
  • Under the terms of the agreement, MSC Cruises’ guests will be able to fly to Abu Dhabi with Etihad Airways to cruise in the region in the Arabian winter. Guests will fly with the national airline of the UAE to their cruise during winter 2015-2016 on MSC Musica.



Silversea - Announced it is adding the following all-inclusive package amenities offered on all Silver Shadow Asia cruises in 2016:

  • Free shore excursions
  • Free Wi-Fi
  • Roundtrip economy air travel and transfers 
  • Two-night, pre-cruise hotel stay 

The all-inclusive packages are available for new bookings made on or after June 24, 2015 on 17 cruises, including, for example, a seven-day voyage to Indonesia, Thailand, and Malaysia. Sailing roundtrip from Singapore on February 6, the cruise starts at just $4,550 per person. 



Macau REVPAR - Maria Helena de Senna Fernandes, director of the Macau Government Tourist Office, said she expects the city’s hotel occupancy rate to improve in the coming months. Hotel occupancy rate stood at 83.9% in May, down 6.4 YoY. Ms Senna Fernandes said she expects room prices to fall with the opening of new hotels. In May, the average room rate in Macau was MOP1,485 (US$186), down by 7.5%.  


Takeaway: May REVPAR in Macau looks very weak and it could get worse in the coming months. Bad news for room rate operators like LVS.

Broken tooth - Famed gang leader known as Broken Tooth Koi has reportedly opened a VIP gaming room in Macau.


Macau-Guangdong Investment - Leong said on Thursday he hoped that through today’s meeting with Guangdong officials the two sides could reach an agreement on the framework for the local government’s plan to invest part of its huge reserves via the Guangdong government. 

  • Leong said the government planned to invest about 10 billion to 20 billion patacas of Macau’s financial reserve. 
  • He said the government was looking to invest in projects related to infrastructure or undertakings that will improve Macau people’s living conditions as that would be more acceptable to the local population.



Macau Housing - The slump in gaming in Macau is beginning to depress the city’s housing market.  The news agency quotes estate agent Jones Lang LaSalle Inc as forecasting that housing prices will drop by 15% this year, the first annual fall since 2008.



Korea Tourism - Air passenger arrivals to South Korea from neighboring China increased 28% YoY to 1.69 million in May, show official data from South Korea published on Wednesday. 

  • Additionally, a weakening in Japan’s currency the yen contributed to a 22% YoY in air passengers on South Korea-Japan routes.  There were 1 million such travelers in May, according to the data from the Ministry of Land, Infrastructure and Transport.
  • For June: The overall number of air travelers in the South Korea market plunged 19.5% YoY in the first three weeks of June, with the drop in international air passenger traffic hovering at about 20% since June 16, according to ministry data.


Takeaway: MERS certainly affected travel.


Europe -  European cruise destinations such as Santorini, Lisbon and Oslo suffered dwindling visitor numbers and spending last year for the first time in a decade as Americans cancelled trips to the Baltic and Mediterranean over geopolitical concerns.

  • Visits to European ports of call were down 7 percent after almost 9 percent growth a year earlier, a report issued by the Cruise Lines International Association (CLIA) on Thursday showed.
  • Passengers and crew spent 3.64 billion euros ($4.08 billion)at ports in Europe last year according to the report, 4.2 percent less than in 2013.
  • The number of Europeans booking cruises remained stable at 6.4 million in 2014 as declining bookings in Britain, Italy and Spain -- partly affected by weak economies -- were offset by a growing number of bookings in Germany.


Takeaway: We believe European struggles were extended into 2015 as confirmed by CCL and RCL.


New Bedford, MA - City residents overwhelmingly approved the proposed construction of the $650 million Foxwoods-managed resort casino for New Bedford's waterfront.  The referendum passed Tuesday with 73% voting in favor of it and 27% against, according to results posted on the city's website.



New Jersey - A new poll finds most people from New Jersey don't want casino gambling in other parts of the state beyond Atlantic City. The poll released Wednesday finds 56% opposed to casinos somewhere other than Atlantic City, and 37% in favor. 



Ohio - The Ohio Supreme Court must decide whether a group can file suit against the state for allowing video lottery terminals at horse racing tracks and other policy decisions related to voter-approved casinos. 

  • At issue is whether the conservative American Policy Roundtable and a dozen other plaintiffs have legal standing to challenge gambling-related legislation and executive actions.
  • The American Policy Roundtable and others say the video slots amount to casino-style gambling that has not been OK’d by voters, and the net proceeds from the devices are not being devoted to educational purposes, as stipulated under the state constitution.
  • The video lottery terminals “were neither contemplated nor included in the definition of ‘lottery’ used in ... the Ohio constitution,” the challengers say in court filings." The operation of such devices exceeds the constitutional authorization to conduct a lottery.



Hedgeye Macro Team remains negative on Europe 

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot has happened in 2015.

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